India’s attempts to cut deficit may see interest rates slashed

INDIA’S central bank faces growing pressure to cut interest rates today for the first time since April after the finance minister pledged to rein in the country’s fiscal deficit.

Remarks by finance minister Palaniappan Chidambaram at a hastily called news conference yesterday that he would nearly halve the deficit in just over four years had increased the chances for a rate cut, some analysts said.

“Net-net, the odds for a rate cut have increased because of today’s press conference,” said A. Prasanna of ICICI Securities Primary Dealership in Mumbai.

A Reuters poll on 19 October found most economists expected the Reserve Bank of India to keep its policy repo rate unchanged at eight per cent.

Nearly half said the RBI would take a more targeted measure and cut the cash reserve ratio, the share of deposits banks must hold with the central bank, from 4.5 per cent in an effort to get banks to pass along earlier rate cuts to borrowers.

The central bank has kept the policy repo rate at eight per cent since April despite calls from members of the government and industry for action to revive the country’s flagging economic growth.